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Lucent misses second-quarter mark, Winstar impacts earnings

By James Evans
IDG News Service, 04/24/01

Lucent Tuesday announced second-quarter earnings that missed analysts expectations by about 14 cents a share as the company's results were hampered by problems with a financial deal involving wireless broadband company Winstar Communications and the value of certain equity investments.

The Murray Hill, N.J., company achieved revenue of $5.9 billion for the quarter ending March 31 compared to revenue of $7.2 billion for the same time last year. Lucent had a pro forma loss of 37 cents a share, company executives said during a teleconference. The results exclude Lucent's current restructuring and related one-time charges of $2.7 billion, as well as costs associated with spinning off Agere Systems, Lucent's former microelectronics unit.

The consensus estimate of 26 analysts polled by First Call/Thomson Financial called for a quarterly loss of 23 cents a share. The range of estimates was from a loss of 12 cents a share to a loss of 47 cents a share. One analyst polled estimated revenue for the quarter of $6 billion, according to First Call/Thomson Financial.

On an as-reported basis, Lucent recorded a net loss of $3.7 billion or a loss of $1.08 per share compared to a net income of $755 million or 23 cents a share for the same quarter a year ago, the company said.

A positive sign was that Lucent saw a 68% increase in revenue from the U.S. from the first quarter to the second quarter. Still, revenue was down 15% compared to the same time last year in the U.S. Outside of the U.S., revenue rose 4% from last quarter, but was down 28% from the same time last year, Lucent said. Non-U.S. revenue represented 30% of overall sales for the quarter.

Lucent's Services division brought in revenue of $1.1 billion for the quarter, a 20% increase over last quarter. Services revenue rose 12% in the U.S. and 38% outside of the U.S. from last quarter, the company said. The division saw year-over-year revenue growth of 11% in the Asia-Pacific region and Canada. Revenue from outside the U.S. for the Services division represented 35% of total sales, Lucent said.

Improvements were seen in sales of all optical product categories, including OC-192 technology, Lucent Executive Vice President and Chief Financial Officer Deborah Hopkins said. Suppliers like British Telecommunications PLC and Deutsche Telekom AG in Europe along with some in China are buying optical products and services, she said.

As far as expenses, Lucent saw selling, general and administrative (SG&A) expenses rise $671 million, up 55% from the same time last year. The increase was primarily related to Winstar. Lucent has said that Winstar is in violation of a financial covenant with the company and has defaulted on payment obligations.

Lucent said it is "fully reserved" - or covered - on its loans to Winstar.

Lucent had agreed to supply New York Winstar with services and equipment and to loan Winstar up to $2 billion to build out its network. Winstar defaulted on a $75 million loan payment in mid-April, which triggered Winstar to miss a payment to Lucent for a credit facility and that cut off Winstar's access to a Lucent line of credit. Winstar has now filed for Chapter 11 bankruptcy protection and has sued Lucent for $10 billion alleging the company failed to meet its contract obligations.

In addition to its financial results, Lucent reported on its efforts on its seven-point restructuring plan. The $2.7 billion restructuring cost exceeded Lucent's expected expenses of between $1.2 billion to $1.6 billion, the company said. The higher restructuring cost comes from "more aggressive product rationalization and the associated write-offs."

The company continues to try to reduce its annual expenses by $2 billion through layoffs, product rationalization, reduced financing costs and decreased discretionary spending, Lucent said. The company already has laid off 2,000 of the 10,000 it said in January it would let go. The other 8,000 will be let go by July's earnings report. Lucent was able to reduce its capital spending by $100 million during the quarter and, in February, the company completed negotiations for $6.5 billion in credit facilities.

Fiscal 2001 is a transition and rebuilding year for Lucent, Lucent Chairman and CEO Henry Schacht said in a statement. Although market conditions are depressed, Lucent expects "modest sequential improvement" on the top line, he said. The full impact of the company's restructuring will be felt during the third and fourth fiscal quarters 2001, Schacht said.

The company has worked on eliminating redundancies, increasing efficiencies and focusing on making established carriers the company's main customers, Schacht said during the morning teleconference.

"We are putting the right tools in place to get us back on track," Schacht said.

Shares of Lucent traded up 45 cents, or 4.89%, to $9.65 a share in late morning trading Tuesday.

Lucent released its earnings prior to the opening of the U.S financial markets. Shares of Lucent closed down 31 cents, or 3.26%, to end Monday at $9.20 a share.

Lucent, in Murray Hill, N.J., is at www.lucent.com.

The IDG News Service is a Network World affiliate.